The lawyers who sought to disqualify their opposing counsel during a pending arbitration must have been giddy when they drew Judge Shira Scheindlin of the Southern District of New York as their judge. Judge Scheindlin, who is famously tough on unscrupulous lawyers, did not disappoint. She went out of her way to exercise jurisdiction over the motion and disqualified attorneys who had received improper communications from the arbitrator in Northwestern Nat’l Ins. Co. v. Insco, Ltd., 2011 WL 4552997 (S.D.N.Y. Oct. 3, 2011).

At issue in Insco was the communication between the defendant’s lawyer and the arbitrator the defendant had appointed. The arbitration agreement called for each party to appoint one non-neutral arbitrator, and then for a third neutral arbitrator to be chosen by lottery. At the outset, the parties and arbitrators agreed that each party could communicate ex parte with their appointed arbitrator, but there could be no ex parte communication about pending motions after they were fully briefed.

One year into the arbitration proceedings, the arbitrator appointed by the defendant shared 130 e-mails with the defendant’s counsel (ostensibly because he was concerned about another arbitrator’s bias). The e-mails included many private emails that had been exchanged solely among the arbitrators during their deliberations over various motions. The arbitrator who had turned over the e-mails then resigned, another arbitrator was appointed, and the panel noted that the resigned arbitrator’s actions were “highly inappropriate” but that the panel would proceed to the hearing and would decide the case on the merits. After the plaintiff’s summary judgment motion was denied, it asked the federal court to disqualify the defendant’s counsel from representing defendant any further in the arbitration, based on its actions in obtaining the private emails and failing to timely disclose their contents.

Judge Scheindlin disqualified the defendant’s attorneys, finding they had engaged in “serious violation[s] of arbitral guidelines, as well as ethical rules.” The Judge further found that the ethical violations could taint the arbitration hearing itself, because the private e-mails “relate[d] to actual and ongoing disputes in the arbitration” — indeed the e-mails included drafts of orders and the neutral arbitrator’s views on a number of pending issues. The Judge noted that: “Allowing parties to obtain confidential panel deliberations would provide an unfair advantage in the legal proceedings and have a chilling effect on the ability of arbitrators to communicate freely.”

The case is unusual in large part because the Court was willing to hear this mid-arbitration motion. In general, the FAA only allows courts to consider any arguments as to the arbitration after the final award is issued. For example, a non-party to an arbitration agreement recently brought a petition to federal court, seeking to overturn an arbitrator’s decision to join that non-party to the arbitration proceeding. The court dismissed the action, noting that Section 10 of the Federal Arbitration Act only authorizes a court to review the fairness of the arbitration proceeding after a final award. Northland Truss Sys., Inc. v. Henning Constr. Co., LLC, ___ F. Supp. 2d ___, 2011 WL 3915538, at *4 (S. D. Iowa Sept. 2011).

In Insco, however, the court relied on New York precedent finding attorney discipline is beyond the jurisdiction of arbitrators and can only be decided by courts. The court also noted that the arbitration panel had refused to consider any sanctions as a result of the e-mail disclosure. The court included some choice quotes from the panel, like “I avoid that whole circumstance because I go forward in life. I don’t go backward.” Those glib quotes from the panel may well have influenced the court’s decision to intercede before the final award.

If New York law applies in an arbitration, there is now a new basis to seek court intervention during an arbitration gone very, very wrong: the unethical conduct of lawyers that may taint the hearing. In fact, the argument may hold water under the law of other jurisdictions as well. A Connecticut court has also been willing to consider a motion to disqualify a lawyer in the middle of an arbitration proceeding. City of Bridgeport v. Kasper Group, Inc., 2002 WL 1008244 (Conn. Sup. Ct. 2002) (denying motion to disqualify, after noting that was an issue for the courts). Furthermore, Judge Scheindlin’s high regard as a jurist will make most courts take a mid-arbitration motion for attorney disqualification seriously going forward.

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by Liz Kramer

Liz Kramer is a shareholder at Leonard, Street and Deinard, one of the largest law firms in Minnesota, where she litigates complex business and construction disputes. Liz graduated from Yale Law School and is deeply knowledgeable on arbitration law. Website: www.arbitrationnation.com